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DEFECTS AND NEEDS OF OUR BANKING SYSTEM 

THE question of the reform of the currency system is 
uppermost in the minds of all, not only in our own 
country, but in Europe as well; for Europe also is 
vitally interested in the problem. So much has been said and 
written on this subject that it is almost a presumption to seek 
to add any new thoughts. There is, however, one point which 
has not as yet been sufficiently emphasized, but which appears 
to lie at the very root of the problem. This is the question of 
our commercial paper. 

It is a strange fact that, while in the development of all 
other commercial phenomena the United States has been fore- 
most, the country should have progressed to so slight an ex- 
tent in the form of its commercial paper. The United States 
is in fact at about the same point that had been reached by 
Europe at the time of the Medicis, and by Asia, in all likeli- 
hood, at the time of Hammurabi. Most of the paper taken by 
the American banks still consists of simple promissory notes, 
which rest only on the credit of the merchant who makes the 
notes, and which are kept until maturity by the bank or cor- 
poration that discounts them. If rediscounted at all, they are 
generally passed on without indorsement, and the possibility 
of selling any note depends on the chance of finding another 
bank which may be willing to give the credit. The conse- 
quence is that, while in Europe the liquid assets of the banks 
consist chiefly of bills receivable, long and short, which thus 
constitute their quickest assets, the American bank capital in- 
vested in commercial notes is virtually immobilized. 

In Europe — as for instance in England, France, or Ger- 
many — there are scores of banks and private banking firms 
which give their three-months' acceptance for the commercial 
requirements of trade, or which make it their specific business 
to indorse commercial bills. A commercial borrower in these 
countries who does not get a cash advance will do one of two 

(390 



8 BANKING REFORM IN UNITED STATES [Vol. IV 

things. He will either sell to his bank or his broker his own 
three-months' bill drawn on a banking firm willing to give him 
this credit, or he will sell the bills drawn by him on his cus- 
tomer (in payment for goods sold to them), which bills will 
be subsequently passed on with the indorsement of the banker. 
This banker's acceptance, or this indorsed paper, can be readily 
negotiated by the buyer at any time whenever there is a profit 
to be derived, or whenever the holder desires to realize on the 
bill. The holder will always be able to dispose of it, either 
through private discounting or, in case of need, by selling, as 
the case may be, to the Bank of England, the Banque de 
France, or the German Reichsbank. In any event, the firm 
or corporation which buys this paper can secure its equivalent 
at any time. The quality of the bills, assured by the estab- 
lished credit of the acceptor or by the various indorsements on 
the bill, is such as practically to eliminate the question of 
credit, and the conditions of the sale will depend only on the 
rate of interest. 

The value of the existence of thousands of millions of such 
standard paper, as it is found in all the important European 
financial centres, can scarcely be sufficiently emphasized. Just 
as the check system is a method of clearing bank cash credits, 
thus helping largely to prevent unnecessary absorption of the 
currency, so modern commercial paper, through the additional 
safety which is secured by the banker's indorsement, acts in 
like manner as a clearing of credits on time not only within 
the community, but, what is just as important, among the var- 
ious nations as well. 

If money tightens in Europe, let us say in Germany, France 
and England will immediately invest in German bills. They 
could not buy the paper of individual German merchants, 
whom they do not know, but they do and must know the value 
of the acceptance or indorsements of the German banks which 
offer and indorse or accept this paper. By a well organized 
system of such bills of exchange the credit of the whole nation 
— that is, of the farmer, merchant, and manufacturer — is 
joined to that of the banker and becomes available as a means 
of exchange both within and without the country. 

(392) 



No. 4] DEFECTS AND NEEDS OF OUR SYSTEM 9 

Under present conditions in the United States, on the other 
hand, instead of sending an army, we send each soldier to fight 
alone. With us the borrower receives money from the bank 
and his note becomes an illiquid asset in the bank's portfolio. 
If the bank desires to raise money, it must use its own credit, 
instead of adding its own credit to that of the borrower, thus 
making the dead note a live instrument of exchange. The 
only modern bills in our country are the so-called " foreign 
exchange " bills, drawn on European banks and bankers, 
which are indorsed and which always have a ready market. 

But what an anomalous position ! Instead of having the 
credit of the entire country available in the shape of millions 
upon millions of modern paper which Europe might and would 
buy, we must rely on the willingness and the ability of a few 
banks and bankers to use their own credit by drawing theif 
own long bills on Europe. This is a costly and most unsci- 
entific mode of procedure, which is in no way adequate to the 
necessities of the situation. For there is, as a matter of course, 
a limit to the amount which the American banker can draw 
and which the European banker will and can accept. 

Recent events have shown the inefficiency of this system. 
In spite of unwise provocation the government banks of Europe 
would not and could not have made a stand against us (as 
they have done during these past few months by raising their 
rates of discount and by discriminating against our so-called 
finance paper) had we been able to send our legitimate com- 
mercial paper instead of forcing the banks and bankers to 
draw their own bills. These bills,, it is true, indirectly help 
commerce, for a bank which requires money in order to ac- 
commodate its merchant customers will call its stock-exchange 
loans, while bills drawn against stock-exchange collateral will 
in turn provide the money that has thus been called. 

But such bills must inevitably bear a financial character, 
and will not be regarded so favorably as commercial paper 
would be. Moreover, since the drawers and, to an even greater 
extent, the European acceptors, are comparatively few, the 
European banks must at times feel that they are getting too 
large an amount of paper drawn on and indorsed by the same 

(393) 



IO BANKING REFORM IN UNITED STATES [Vol. IV 

firms. As these bills, drawn, as the case may be, in pounds, 
francs, or marks, sell normally at the same rate of private dis- 
count as all the other long bills in the country, the European 
banks find no particular inducement to purchase them. When, 
therefore, there is an excessive amount of these American 
bills offered, the consequence is discrimination, and, what is 
worse — owing to the financial aspect of the bills — a feeling of 
uneasiness and distrust. 

If instead of this unfortunate method of financing we could 
offer American paper drawn in dollars, showing its commercial 
origin and indorsed by and drawn on American banks or 
banking firms, we should vastly multiply the avenues leading 
into the portfolios of the European banks, and our bills would 
be well spread instead of going into a few channels which can 
so easily be closed. We should create a new and most power- 
ful medium of international exchange — a new defense against 
gold shipments. This is no visionary theory. In view of the 
fact that a great many millions of even Russian bills are con- 
stantly held by French, English, and German banks, institu- 
tions and capitalists, there is no reason whatsoever to doubt 
that these same avenues could be readily opened to American 
paper. 

In order thus to make our paper part and parcel of the 
means of the world's international exchange, it needs, how- 
ever, as a preliminary condition, to become the foundation on 
which our own financial edifice is erected. It must always have 
a ready home market, where it can be rediscounted at any 
moment. This is insured in nearly every country of the world 
claiming a modern financial organization, by the existence of 
some kind of a central bank, ready at all times to rediscount 
the legitimate paper of the general banks. Not only England, 
France, and Germany have adopted such a system, but all the 
minor European states as well — and even reactionary Russia 
— have gradually accepted it. In fact, Japan without such an 
organization could not have weathered the storm through 
which she has recently passed, and could not have achieved 
the commercial success which she now enjoys. 

Our methods are just the reverse of the European system. 

(394) 



No. 4] DEFECTS AND NEEDS OF OUR SYSTEM 1 1 

With us call money does not go into the bill market. Every 
American bank, since it cannot count on reselling the notes 
which it buys, must necessarily limit the amount which it can 
properly invest in American paper, and as a consequence 
almost all the call money is invested in demand loans on the 
stock exchange. The result of this is that the overflow of 
money of the entire country, from the Atlantic to the Pacific, 
is thrown into the stock exchange, making stock-exchange 
money easy and stimulating speculation when trade is relax- 
ing, while on the other hand, as soon as demand for money 
for commerce and industry increases, the funds to provide for 
the needs of the whole country are called from the stock ex- 
change, causing a disturbance there. 

Our whole elasticity is built up on the bond and stock 
market. Banks can issue notes on government bonds, and call 
money is kept in stock-exchange loans. In Europe the situa- 
tion is reversed ; banks issue notes primarily against their pur- 
chases of bills of exchange, and the reserves of the country are 
kept primarily in bills of exchange. 

In Europe banks and bankers invest against their deposits 
chiefly in bills of exchange, short and long, and only to a 
comparatively small extent in fortnightly or monthly settle- 
ment money on the stock exchange or in call loans on stock- 
exchange collateral. If call money becomes easier, it is in the 
first instance the rate for short and long bills that goes down, 
and since this rate is practically the same all over the country, 
a withdrawal or an influx of money, instead of being felt 
primarily by the stock exchange, is borne equally by thousands 
of millions, the grand total of all money invested in such bills 
being a great many times larger than the comparatively small 
amount employed in stock-exchange loans. It is like throw- 
ing a pebble into a pond ; the ripples will slowly spread in con- 
centric circles, until in the end they are scarcely perceptible. 
With us it is like casting a stone into a small basin ; the entire 
surface is suddenly and violently agitated for a short time. 

To explain briefly the workings of a European central bank, 
to show how little political power need attach to it and how 
little it interferes and need interfere with the business of the 

(395) 



I2 BANKING REFORM IN UNITED STATES [Vol. IV 

general banks (except to act as a general brake on the market, 
if it over-extends, and to provide for the needs of the country, 
as long as they are legitimate) it may be well to say a few 
words about the German Reichsbank, admittedly the most per- 
fect organization of its kind. 

The capital stock of the German Reichsbank is owned 
partly by the government and partly by the public. The 
Reichsbank has a central board in Berlin, consisting of the 
foremost men in financial and commercial circles. The presi- 
dent of the bank is a salaried officer, a trained banker (no 
politician) who retains his position irrespective of the party 
in power, like the president of any private bank who remains 
in office as long as he does his work well. The Reichsbank has 
its branches in every important town similar to our central 
reserve and reserve cities. Each branch has its own board of 
directors, consisting of ten or twenty men, representing the 
best financial and commercial men in the locality, while each 
branch has its own salaried president, responsible to the board. 
The chief duty of the bank, leaving all other details not bear- 
ing upon our subject aside, is to buy at the published bank 
rate legitimate paper, which must bear the acceptance or in- 
dorsement of at least two well-known banks or bankers. This 
bars the Reichsbank from doing a general commercial busi- 
ness, and converts it practically into a bank for the other banks. 

Moreover, the published rate of the Reichsbank is, as a 
rule, from y 2 of i% to i% higher than the private discount 
rate at which the other banks buy paper. Since, however, the 
central bank has branches in every town, the banks use it 
chiefly in the normal course of events for the collection of bills 
throughout the entire country as they fall due. The bank has 
its established rules for such collections, deducting at its pub- 
lished rate from five to ten days' interest, according to the dis- 
tance of the towns on which the bills are drawn, but not charg- 
ing any commission. 

According to this system, for instance, a Hamburg bank, 
owning a bill on Munich, would sell the bill to the Reichsbank 
five days before it falls due, simply rediscounting the last 
five days at the bank rate. A Munich bank having a bill on 

(396) 



No. 4] DEFECTS AND NEEDS OF OUR SYSTEM 13 

a Hamburg bank would do the same, both getting the money 
immediately, while the Reichsbank, as the general clearing 
house, would simply transfer on its books the credits of the 
one branch to those of the other. Through a system of this 
kind it is possible to avoid the constant remittance of cash and 
the locking up of money by the banks. The advantages that 
a system of this kind would bring to the United States are 
obvious. 

When money tightens in Germany the banks rediscount 
through the Reichsbank their short bills which have a little 
more than five days to run, and as the private discount rate 
throughout the country rises, the bills that the banks redis- 
count will gradually be longer and longer. While this process 
is in progress, the private discount rate and the bank rate will 
be approaching each other. If rates are comparatively low, 
the general tendency of the Reichsbank will be to advance its 
rate, so as not to be forced to put out too large an amount of 
notes issued in payment for the bills. For, as is well known, 
the bank is compelled to pay a tax when its note circulation 
exceeds a certain limit. After a normal amount of its notes is 
out, the Reichsbank will, therefore, tend to keep its rate well 
above that of the ordinary banks until the rate of interest re- 
ceived in discounting paper is high enough to indemnify the 
Reichsbank for the payment of the tax. 

As a consequence the Reichsbank, as a rule, keeps its rate 
high enough to leave to the ordinary banks the general busi- 
ness and the fixing of the rates at which this business is con- 
ducted. By raising or lowering its rate, however, the Reichs- 
bank indicates the general trend and exerts a moral and prac- 
tical influence on the tendency of the banks to extend or to re- 
strict business. If money is low in Germany and high in other 
countries, with a natural consequence that German capital 
would leave the country, and gold as a result be exported, the 
Reichsbank will work for a higher rate of interest as a precau- 
tionary measure, and the general banks will, as a rule, follow 
the Reichsbank's lead. 

In the opposite case, however, when money is becoming very 
scarce in Germany, there is no fear at any time of a money 
2 6 (397) 



1 4 BANKING REFORM IN UNITED STATES [Vol. IV 

squeeze, as the Reichsbank, on paying the tax, can issue a vir- 
tually unlimited amount of notes as long as safe and legiti- 
mate paper is offered for discount. In times of very high 
money the Reichsbank will at a certain point cease to keep its 
own rate above the private discount rate of the banks, and at 
such times the ordinary banks will often rediscount with the 
Reichsbank not only the short bills, but even the long ones. 
Thus the duties of the Reichsbank are, on the one hand, to 
counteract the influence of too abundant a money supply, and 
on the other hand, to furnish at legitimate rates all the money 
that the country legitimately may require. 

It should be added here that the Reichsbank also makes 
loans on collateral. There is, however, a fixed rate for this, 
namely, i% above the bank rate. This is, as a rule, a much 
higher rate than that at which the general banks will furnish 
the money, and in addition there exist very strict regulations 
as to the kind of securities on which the Reichsbank is per- 
mitted to advance money and as to the percentage of the 
market value of the securities which it may loan. Since these 
rules are much more rigid than those of the general banks, 
nobody would under normal circumstances apply to the 
Reichsbank for a loan on collateral. When money becomes 
scarce, however, the banks or the bankers can always count on 
the Reichsbank to fall back upon, and in case of a crisis this 
is readily done. 

The ability of the Reichsbank to advance against securities 
is, however, of minor importance as compared with the fact 
that the existence of such an institution forms the foundation 
on which is erected the whole system of financing the business 
interests of the empire on bills; for this results in an elastic 
system, expanding and contracting, according to the require- 
ments of trade and industry. 

Reason, as well as the experience of all other nations, tells 
U9 that we in the United States should attempt to reorganize 
our present system of issuing and handling commercial bills, 
in order to create the basis necessary for a modern system of 
currency and finance. Not only, however, should we endeavor 
to make such bills the medium of equalizing the daily demand 

(398) 



No. 4] DEFECTS AND NEEDS OF OUR SYSTEM \ 5 

for and supply of money, but we should also by all means try 
to break with the other system, which makes call loans on 
stock-exchange collateral serve for this purpose. 

Let us next consider another point of some importance. 
The principal stock exchanges in Europe have their dealings 
for fortnightly or monthly settlements, while on the New York 
stock exchange all transaction are for daily cash settlements. 
The advantages of the European system are obvious ; it avoids 
unnecessary duplication of work and unnecessary outlay of 
money, and it assures a greater stability. 

In Europe the " positions " are " carried " from one settle- 
ment to the next; that is to say, the broker borrows or lends 
the money from the end or the middle of the month to the 
next settlement day at a rate of interest agreed upon in ad- 
vance. Unlike his unfortunate New York brother, he need 
not find his money from day to day, and he need not fear that 
money rates will jump from 4% to 100%, or that, even at such 
rates, he may not be able to secure the money at all. 

In Europe the amount employed on the stock exchange is a 
fairly constant one. The daily plus and minus of the demand 
for or the supply of money is adjusted in the bill market, and 
if more money is required on settlement days and the rate of 
settlement money rises, the normal consequence is that more 
money will go from the bill market to the stock exchange, and 
be employed there until the next settlement. This process 
takes place year in and year out practically without any ser- 
ious disturbances; fluctuations and exorbitant money rates 
such as we have so frequently witnessed in this country are not 
only unheard of, but absolutely inconceivable in Europe. 
From settlement to settlement in Europe the broker and the 
customer are safe ; the stock-exchange loans remain unchanged. 

If such a system of settlements should be established on the 
New York stock exchange — for which case it would be ad- 
visable, in order not to stimulate gambling, to provide in some 
way for putting up margins to protect the contracts — several 
objects would be achieved. In the first place, individuals 
would be in a position to secure money for a reasonable time 
and at reasonable rates, and panicky fluctuations, so frequent 

(399) 



1 6 BANKING REFORM IN UNITED STATES [Vol. IV 

at present, would become rare. Secondly, the regulation of 
the daily supply and demand of money would be forced from 
the stock exchange into the bill market. 

It should be added here that our present system of cash 
dealings on the stock exchange is forced upon us as the result 
of the unreasonable usury law of the state of New York, 
which, although making it unlawful to take more than 6% on 
time loans, is in reality the direct cause of an almost confisca- 
tory rate being charged from day to day for weeks at a time. 

That the usury law should provide a maximum rate for 
pawn shops or for small individual loans is defensible, but for 
large business transactions most of the European laws do not 
limit the rate. Even in those countries which still retain some 
form of usury laws, in order to constitute usury it must be 
proved that the party taking the money was in dire stress and 
that the party loaning the money designedly took advantage 
of the debtor's helpless position to exact an exorbitant rate. 
If the hight of the rate is to be the deciding factor in judging 
whether usury has been exacted, the law ought to state the 
maximum amount permissible in excess of the ruling interest 
rate of the country (like, e. g., the bank rate abroad). 

But for the large transactions of a country one fixed maxi- 
mum rate cannot be laid down by law. It is preposterous to 
extend such a principle to the business of large solvent houses, 
and to prevent them from making a legally binding contract 
for time money at more than 6% in the face of the fact that 
such a loan at 7% or even 8% might be of the greatest benefit 
to them, while the impossibility of securing money except on 
call at ridiculous rates might cause the most severe loss of 
money and of business. Conditions like the present show the 
absurdity of such a system; when money in Europe is worth 
more than 6% on time — as happens to be the case just at pres- 
ent — the consequences can only be that under present circum- 
stances some people will loan at more than 6% on time, and 
take the risk of such illegal action. As there are, however, 
comparatively few, the call rate must rise to such an abnormal 
hight as is necessary to keep money from going abroad or to 
attract a new supply to our country. But as this exorbitant 

(400) 



No. 4] DEFECTS AND NEEDS OF OUR SYSTEM I? 

rate for call loans may break from day to day, in considera- 
tion of the resulting risk of exchange connected with the trans- 
action, one might say that the rate for short money, in order to 
attract foreign capital, will rise about 10% to 20%, where the 
rate for time money would have to rise only 1%. 

With no modern paper to offer, with the usury law limit- 
ing the legal time rate to 6%, and with an unwritten law, ob- 
served by many banks, not to charge their regular customers 
more than 6%, even on call loans, our only primitive means of 
protecting the country are either an immense rate for call loans 
in the open market or a violent break in the price of our securi- 
ties, as a rule the consequence of such shortage of money. This 
break must bring our securities down to a level where Europe 
will buy, and ultimately results in a relief of our money market 
by reason of remittances from abroad for such purchases. 

Such are the consequences of the perpetuation of an absurd 
system which has been abandoned everywhere else. Banks 
and bankers may by manipulation sometimes exaggerate the 
disgraceful conditions which exist in our money market, but 
the direct cause is our present system, which makes these 
occurrences, as it has been endeavored to make clear, abso- 
lutely inevitable. 

Our immense national resources have enabled us to live 
and prosper in spite of our present system, but so long as it is 
not thoroughly reformed it will prevent us from ever becom- 
ing the financial centre of the world. As it is, our wealth 
makes us an important but dangerous factor in the world's 
financial community, with immense resources indeed, but with- 
out a central organization of our own, using and sometimes 
abusing the financial organization of Europe in order to atone 
for our own shortcomings; unable effectively to put on the 
brakes ourselves, we compel the government banks of Europe 
to take measures for the regulation of our own household. 

In closing, a few words may be said about the propositions 
now before the country with reference to currency reform. 
At the outset we were between Scylla and Charybdis ; on the 
one hand the tendency to give unlimited power to the Secre- 
tary of the Treasury — a political officer, possibly untrained in 
2 6* (40O 



1 8 BANKING REFORM IN UNITED STATES [Vol. IV 

the banking business and one who, although probably in most 
cases unselfish and wise, may also be selfish and unwise; and 
on the other hand the movement of the bankers' association 
to take all power from the treasury, forcing it to put out its 
money at a fixed rate and practically vesting its power in the 
national banks. The one tendency appears to be as bad as the 
other ; it is dangerous to give so much power to one individual 
who is not in business, but it is equally dangerous to give so 
much power to men who are all in business. The bills re- 
cently introduced in Congress show a material improvement 
on these first attempts. 

The one bill, known as the Elkins bill, which empowers the 
Secretary of the Treasury to deposit with the national banks 
against collateral all moneys received — including custom-house, 
revenues — leaving the rate of interest, however, to be fixed in 
his discretion, deserves unqualified indorsement. It leaves a 
vast discretionary power with the Secretary, but this is a nec- 
essary evil as long as we have no central bank. To make the 
treasury an automatic institution and practically to transfer 
its powers to the national banks would be worse ; for it is im- 
possible to see how any concerted action could be taken by 
these banks to protect the country (as a central government 
bank would do by increasing the rate of interest or by supply- 
ing money at moderate rates) if such a course proved to be 
contrary to their interest. They are, after all, money-making 
concerns — not public institutions — keenly competing against 
one another, and they cannot be forced to cooperate in any 
way that may injure their own business. There must be some 
power capable of taking an unselfish and larger point of view, 
for otherwise the country would be without any financial pro- 
tection whatsoever. This function must be left for the time 
being to the treasury, which, by increasing or decreasing the 
rate at which it deposits the government funds in the banks, 
can put on the brake to a certain extent and thus protect the 
country and its gold. 

It is to be feared that any scheme which attempts to estab- 
lish a concentration of control of note issue by the national 
banks and to create a joint guarantee of such notes will fail 

(402) 



No. 4] DEFECTS AND NEEDS OF OUR SYSTEM ig 

of adoption or will not work, in the long run, for the reason 
that each individual bank will be unwilling to submit to con- 
trol or interference, and that the conservative banks will 
sooner or later feel that they are shouldering the burden for 
the less careful sister institution, which, if it fails, would in- 
flict losses, to be borne by the joint guarantee fund contributed 
by all the banks. 

The second bill which has been introduced meanwhile is 
the bill of the House committee on banking and currency, 
which urges that authorization be given to any national bank 
to issue unsecured notes to the extent of 25% of its capital, on 
paying a tax of 3%, and an additional 12^% on paying a tax 
of 5%. This bill is undoubtedly an improvement on the pro- 
position of the bankers' association, as through the higher tax 
there is more probability that the notes would be redeemed 
from time to time, since it would pay the banks to keep even 
the lower-taxed notes in circulation only as long as money 
is worth at least 4^%. The rising scale, however, previously 
recommended by the chamber of commerce appears to be the 
safer plan, as with the almost stationary rate of 6% for com- 
mercial paper, some of the country banks might otherwise be 
tempted to keep the lower-taxed notes outstanding nearly all 
the time. This, instead of elastic circulation, would mean in- 
creased circulation, which is not needed. But the chief ob- 
jection to this bill and all similar recommendations is that it is 
a wrong principle to allow any bank giving unsecured com- 
mercial credits to issue unsecured notes. Besides, if a bank is 
allowed to issue, as a net result, about 28% (37% less the 
25% reserve) of its capital in unsecured notes, does it not 
simply mean that the bank, on paying a certain tax, may in- 
fringe upon its reserve to this extent? Should we not through 
such a measure place our national banks on a less conservative 
basis than they were heretofore, when they were not allowed 
to issue unsecured notes? Undoubtedly our system would 
gain in elasticity, and the guarantee fund might grow to take 
care of the notes of many a bank that might fail, perhaps just 
in consequence of the greater latitude offered to it by the pres- 
ent bills, but the principle remains bad all the same. 

(403) 



20 BANKING REFORM IN UNITED STATES [Vol. IV 

1 strongly believe that banks issuing unsecured notes which 
are to pass as the people's money should be restricted to buy- 
ing paper that is endorsed by other banks or banking firms, 
and that they should be restricted also as to the kinds of loans 
to be made by them; in short, they should not be allowed to 
take the same risks as every general bank or banking firm. 

To meet, however, the needs of the hour it might be advis- 
able to authorize the banks to issue notes, on paying a tax as 
proposed by this bill, but to secure these notes by a deposit of 
paper bearing at least three bona-f.de signatures, of which at 
least two would have to be those of banks or bankers. 

This course would commend itself for several reasons. 

1. It is more conservative and would make the banks and 
the notes safer. 

2. It would force the banks to apply the money to be re- 
ceived from additional circulation to the purchase of commer- 
cial bills; it would prevent the money from being used directly 
for stock-exchange loans, as it could be under the present bill. 

3. It would further the creation of modern paper, since, if 
such a law were enacted, modern paper which could be de- 
posited would be taken in preference by the banks. 

4. Certain committees would have to be appointed in every 
reserve and central reserve city in order to scrutinize the bills 
deposited as security by the banks. These committees might 
be the predecessors of future local committees of a central or- 
ganization. 

5. We should lay the foundation to modernize our financial 
structure, a foundation that would carry in itself the elements 
of a central system built up on the trade, commerce and in- 
dustry of the country, an end which at present is far out of our 
reach. 

The scope of the issue of secured notes can be safely en- 
larged from time to time, especially since a guarantee fund 
of secured notes would grow rapidly with comparatively few 
losses, while the bill of the House committee would be limited 
in its scope, and would be only a makeshift, endangering the 
safety and soundness of our currency. 

Whether a cential bank will be eventually owned by the 

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No. 4] DEFECTS AND NEEDS OF OUR SYSTEM 2 1 

national banks is impossible to foretell, nor can it be predicted 
whether the business of accepting and rediscounting will be- 
come the domain of the trust companies and the general banks, 
or whether new discount companies, like those in England, 
will be started for this purpose. It is, however, not beyond 
the bounds of imagination that a wholesome line of demarca- 
tion between the business of national banks and that of other 
financial institutions might gradually be reestablished through 
such a development. Such paper could eventually be ad- 
mitted also as collateral against the deposits of treasury money. 

That a central bank is the ideal solution of the difficulty 
and that it must finally come — though, perhaps, we may not 
live to see it — is my firm belief. None of the reasons ad- 
vanced against it are tenable. 

It has been argued that a central bank would be dangerous, 
as, in fact, it was in the past, because it might become the 
tool of politicians, and it has been frequently stated that " we 
do not want politics in business." But the powers which the 
Secretary of the Treasury, a political officer, must exercise 
now are much vaster than those that any single officer of a 
central bank would ever enjoy, and these officers could be 
appointed in such a way — for instance in part by the govern- 
ment, by the national banks, by the courts, by the chambers of 
commerce — that the constitution of the board would be taken 
entirely out of politics. Are we not unduly depreciating our- 
selves by saying that we should not be able to find a set of 
business men of sufficiently high standing to form the central 
and local boards of such a central bank, and that we could not 
secure salaried officers competent to fill the post of managers 
of the central bank and of the branch offices? 

I think that we are greatly mistaken if we believe our coun- 
try so entirely different from all others that we should be 
obliged to continue to do the opposite of what is done by them, 
while the system of all other important nations has proved to 
be excellent, and ours has proved to be defective. 

We have reached a point in our financial development where 
it is absolutely necessary that something be done to remedy 
the evils from which we are suffering, and it would be a thou- 

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22 BANKING REFORM IN UNITED STATES 

sand pities if our legislative bodies did not meet the situation. 
Let us, however, be careful clearly to recognize the cause of 
the evil before we act, so that we may not be found repairing 
the roof while the foundation is rotten. 

Meanwhile there remains important work to be done by the 
banking community itself, without any aid from Washington. 
At present our bankers look with scorn on rediscounting and 
accepting American bills. They should recognize the fact 
that these two branches of business are not only most legiti- 
mate, but most necessary for the nation's development. 

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